Debt-limit default could cut deeply in Michigan

Oct. 10, 2013

Written by

Detroit Free Press Washington Staff

WASHINGTON — Much of the pain of the 10-day-old federal shutdown has been largely invisible, contained so far by spending reserves, stopgap measures and unpaid federal workers still on the job.

That could change in the near future — especially in Michigan.

Unless Congress settles on a deal to raise the $16.7-trillion debt limit a week from now on Oct. 17, the U.S. will exhaust its ability to borrow money, a circumstance that could lead to its first-ever default. Such a scenario could torpedo stock prices, raise interest rates, choke off consumer lending and call into question which of the country’s obligations — to its seniors, schoolchildren, military families, overseas investors and more — will be met, if any.

In Michigan, the ripple effect would put the brakes on automakers and their suppliers at a time when vehicles have been selling at a near record pace; it could collapse the still-rebounding housing market, and it would come as the effects of a longer-term federal shutdown are starting to be felt, with furloughs for thousands of state workers beginning to kick in — possibly as soon as Monday — and food assistance to more than a million Michiganders drying up.

“Michigan might have it worse than the rest of the country because of our economy’s dependence on manufacturing, in general, and cars specifically,” said Alex Rosaen, a senior consultant with Anderson Economic Group in East Lansing. “Not only do people need to feel secure to make purchases, they need credit to buy cars.”

“It’s ridiculous that Congress can’t come together to solve the debt problem,” said John Nixon, state budget director for Michigan. “Further delays or postponements don’t serve our citizens well. A default would be unprecedented and has the potential to be catastrophic to our economy.”

Some 40% of the state’s budget comes from the federal government.

Few really expect it to happen: The potential fallout from a U.S. default is so scary, it’s led the U.S. Chamber of Commerce, the National Association of Manufacturers, the National Retail Federation and others to implore quarrelsome members of Congress who have been in a long debate over health care reform and the size of government spending to end the shutdown and raise the debt ceiling immediately.

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At the moment, however, there is no clear path to either raising the debt ceiling or reopening government, even though it seems most members of Congress want to do both.

Uncharted waters

What might or might not happen in the event that the debt ceiling doesn’t get raised is a matter of great speculation, if for no other reason than it’s never happened before.

The basic rundown goes something like this, however: Depending on whom you believe, the U.S. government — which makes some 4 million payments a day — might be able to pay some bills for a short time, but by no later than month’s end, it probably wouldn’t be able to pay its obligations to holders of government-issued financial instruments and continue to cover all its other payments, which include Social Security checks, Medicare benefits, defense contracts and more.

U.S. Rep. Justin Amash of Cascade Township is one of a group of Republicans who have dismissed the idea of a default, saying there’s enough tax revenue that comes in each month to cover the government’s interest on its financial debts.

But questions have been raised about how much flexibility — technically, legally and otherwise — the Treasury has to decide what gets paid and what doesn’t, absent clear direction from Congress.

Even if the Treasury did pay interest and principal on its debts and cut out the rest of its spending, however, it could lead to a drastic economic slowdown. Michigan’s 2 million Social Security beneficiaries could see checks delayed if the crisis lasted into November. And health systems might have to do without Medicare and Medicaid reimbursements.

Treasury Secretary Jacob Lew is expected to provide more details Thursday to a Senate committee.

The overall financial impact — if markets are as roiled as many expect to happen even as Oct. 17 approaches — could sink consumer confidence, in turn damaging the bottom line of Michigan’s manufacturers and suppliers, though no one can say for how long or by how much.

“Michigan is in the unfortunate position of being really hurt even though it’s not the source of most of the wasteful government spending,” said Erik Gordon, an economist who teaches at the University of Michigan’s schools of business and law. “I think if it happens, it will be a horrendous mistake.”

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Effects to be felt

Among Michigan’s congressional delegation, the call to end the shutdown and address the debt ceiling has been largely unanimous. But House Republicans continue to clamor for Democrats to address other issues — the shutdown started over demands for defunding or delaying implementation of the Affordable Care Act — before they will agree.

Democrats, meanwhile, have said they are open to negotiating on other issues, but only if the shutdown is first lifted and the debt ceiling raised.

Across the state, however, the shutdown’s effects could soon begin piling up.

Already, state government has sent out furlough notices to 15,000-20,000 employees, ranging from Human Services caseworkers to highway engineers, whose jobs are at least partially funded with federal money. The earliest round of those furloughs could go into effect as early as Monday.

Federal food assistance programs, funded through other sources for now and benefiting some 1.6 million people, would start to dry up by month’s end, with notices going out by Oct. 20. In Oakland County, Health and Human Services Director George Miller said officials are already preparing Gleaners Community Food Bank for what could be a spike in demand.

“If they’re not getting their checks, there’s potentially a whole other batch of people who come into need,” he said.